Why QSuper invests in foreign currencies
05 January 2022
Learn more about why and how QSuper invests in currency – and why the fund doesn’t invest in Bitcoin.
There’s something special about landing in a foreign country and first setting your eyes on a new currency. Different faces, flora and fauna feature on notes and coins; paper and metal composition may also feel new to the touch.
Also different is what that currency can buy. Whether a meal or hotel room seems pricey or a bargain depends on a quick mental conversion using the current rate of exchange. This also applies to the investments QSuper makes on members’ behalf.
We caught up with QSuper Senior Portfolio Manager, Jimmy Louca, for a quick Q&A.
Q: Are QSuper portfolios exposed to foreign currency?
A: Absolutely. QSuper portfolios inherit foreign currency exposure when the fund invests overseas. For example, our investment in Heathrow airport in the UK is in British pounds. Therefore, the value of Heathrow in Australian dollar (AUD) terms is not only affected by airport-specific issues (such as a new runway), but also by the movement of the pound. If the pound becomes more expensive for Australians, the value of the airport rises for Australian investors (and vice versa).
In order to achieve our return and diversification objectives for members, QSuper portfolios invest significantly abroad, such that around 50% of the Balanced and Aggressive portfolio is invested in assets denominated in foreign currencies.
Q: Does foreign currency play any other role in QSuper investments?
A: Yes, in addition to buying assets held in foreign currency, QSuper also may use financial markets instruments to access other currencies.
There are two reasons QSuper aims to hold particular currencies. The main one is diversification. QSuper invests in currencies of larger economies that we call “safe havens”. These include the US dollar, Swiss franc, the euro, and the Japanese yen. These currencies tend to rise against the AUD when there is a growth shock or recession. One reason for this is that Australia is a small, open economy that is more affected by global growth shocks and relies more on foreign funding, which is withdrawn in a growth shock.
Because these foreign currencies rise when global equity prices fall, they provide diversification.
The second reason QSuper may hold foreign currencies is return. There are some emerging market currencies that may rise over time versus the AUD, because those countries’ productivity and institutions strengthen, for example.
Together, these safe-haven and emerging-market currencies make up QSuper’s foreign currency exposure.
Q: Does QSuper invest in cryptocurrencies?
A: QSuper sees cryptocurrencies like Bitcoin as more of a speculative asset rather than a currency per se and as such has no current exposure.
Cryptocurrencies fall short of some key fundamental investment criteria that is set by QSuper.
Bitcoin does not offer a stable return stream like other assets. For example, you earn rental income when investing in real estate, and you earn the Mexican deposit rate when you buy the Mexican peso. Similarly, fundamentals like differences in money supply, interest rates, and economic growth help explain a foreign currency’s fair price. In contrast, Bitcoin has seen price moves of 20% on Elon Musk’s tweets, suggesting pricing is easily manipulated. Finally, Bitcoin has suffered large falls, as countries like China banned mining of the currency because of Environmental, Social and Governance (ESG) concerns (the large energy usage involved) or forbidden banking institutions from providing Bitcoin transaction services (regulatory risk).
Cryptocurrencies also fail to provide the diversification of safe-haven currencies, as they often fall alongside equity corrections, compounding losses.
Q: Then why are central banks bringing in their own ‘digital currencies’?
A: China is already piloting a digital currency, while the US and Europe are also considering this.
These digital currencies are different from cryptocurrencies. They involve similar computing techniques that offer faster settlement and lower fees (think of COVID-19 relief payments reaching people in need much faster), but their pricing mechanism is designed to be similar to that of traditional currencies and based on some of the same economic factors.
I’ll leave you with one abstract thought on digital currencies.
Some believe they would actually help monetary policy fight the next recession, in a world of near-zero interest rates.
This is because with traditional paper money, central banks can lower interest rates only to a certain point. Say a bank lowered rates to negative territory, charging customers 0.5% (as opposed to paying them) for deposits. Charging people for saving money is designed to get them to spend it. However, as long as it costs less than 0.5% per year to store money at home (with a safe deposit box or insurance), people will withdraw their money from banks.
If digital currency replaced paper currency, withdrawing becomes much harder to do, and interest rates could be theoretically pushed much more into negative territory.
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The opinions expressed do not necessarily reflect the opinions of the QSuper Board. No responsibility is taken for the accuracy of any of the information supplied and you should seek advice for your circumstances.